NY futures closed the week slightly higher, with March adding 52 points to close at 71.42 cents.

It was an another uneventful week in the cotton market, with the March contract closing the last five sessions in a very tight range of just 41 points, between 71.01 and 71.42 cents/lb. From a technical point of view the market is stuck in a well-defined narrowing triangle formation dating back to August, with its current boundaries at around 69.50 and 71.90 cents.

In our opinion the market’s inertia is caused by these massive spec long and trade short positions, which have grown even bigger last week. The latest CFTC ‘Commitment of Traders’ report showed that as of November 29 speculators had increased their net long to a record 11.24 million bales, whereas the trade was 18.06 million net short.

The market seems to be boxed in by these huge positions, since speculators are already so long that they don’t have much firepower left to force the market higher, while the trade is going to be a strong net buyer on dips, preventing the market from falling. For the market to break out of its current stalemate speculators would have to provide sell-side liquidity or the trade might have to pay up to cover its sizeable net short.

Who will blink first? As stated repeatedly we feel that the trade has the weaker hand, because it has no choice but to buy back its short position over the coming months, as mills fix and basis-longs get sold. It is rather amazing to see that unfixed on-call sales rose again by over 400,000 bales last week and now amount to an astonishing 9.7 million bales. Only during the historic 2010/11 bull market did we see a higher unfixed on-call position than that.

While the trade will be forced to buy out of its short, speculators have the luxury to sit on their hands if they decided to do so by rolling their net long down the calendar. This could cause an imbalance and thereby exert upward pressure on the market!

US export sales for the week that ended on December 1st were the highest since January 2015, as no less than 409,400 running bales of Upland and Pima cotton were sold. Participation was broad-based with 18 markets buying, while 25 destinations received shipments of 237,700 running bales. It is interesting that the sales number more or less matched the increase in the on-call position, which tells us that most of these sales have yet to be priced.

Total commitments for the season now amount to 7.7 million statistical bales, which compares to 5.0 million bales at this time a year ago. Shipments of 3.1 million statistical bales are also significantly ahead of the 1.9 million that were exported a year ago. For the remaining 8 months of the marketing year weekly export sales will have to amount to only around 120k bales, or some 135k if we allow for a carryover.

The only negative for cotton this week was the stronger US dollar index, which strengthened again today after the European Central Bank decided to keep its printing press running through 2017, albeit at a slightly slower pace. Instead of 80 billon Euros it will print ‘only’ 60 billion a month starting in April. However, that still amounts to 860 billion Euros between now and the end of 2017. But who’s counting?

So where do we go from here? The irony is that by being bearish and therefore buying almost all cotton ‘on-call’ in recent months, mills have created a potentially bullish monster! There are now nearly 10 million bales that have been bought but not priced yet and this represents a tremendous amount of buying power. The hope is of course that the specs will oblige and eventually sell out of their 11 million bales net long position, which would allow mills to fix in a falling market. But what if speculators were to sit tight?

The current situation reminds us of the old saying “when in a hole, stop digging”, yet week after week we see mills digging themselves deeper into trouble. Maybe the market will be kind enough to give the trade its much hoped for 3-4 cents correction, but we have that uneasy felling that the current setup is an accident waiting to happen and that the next big move is going to be a nasty short-covering rally!

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